CFS CFS Mutual Funds & ETFs 2 — Questions and Answers
Question 1: What is 'style drift' in mutual fund management?
- When a fund deviates from its stated investment objective or style category (Correct answer)
- The gradual shift in a fund's expense ratio over time
- Changes in a fund's distribution frequency
- When a fund's NAV declines relative to its benchmark
Correct answer: When a fund deviates from its stated investment objective or style category
Style drift occurs when a fund manager invests outside the fund's stated mandate (e.g., a large-cap fund buying small-cap stocks), which can disrupt an investor's intended asset allocation.
Question 2: The 'expense ratio' of a mutual fund represents:
- The annual cost of operating the fund expressed as a percentage of average net assets (Correct answer)
- The total sales charges paid when buying and selling the fund
- The ratio of management fees to total fund returns
- The fund's annual turnover rate relative to its assets
Correct answer: The annual cost of operating the fund expressed as a percentage of average net assets
The expense ratio is the annual percentage of fund assets used to cover operating costs including management fees, administrative expenses, and 12b-1 fees.
Question 3: What is a 'breakpoint' in mutual fund sales charges?
- A discount on front-end sales loads available when investing above certain dollar thresholds (Correct answer)
- The point at which a fund closes to new investors
- The minimum investment required to open a fund account
- The NAV price at which a fund splits its shares
Correct answer: A discount on front-end sales loads available when investing above certain dollar thresholds
Breakpoints are volume discounts on Class A share sales loads that reduce the percentage charged as the investment amount reaches certain thresholds.
Question 4: What is the 'creation/redemption' mechanism that makes ETFs tax-efficient?
- Authorized participants exchange baskets of securities for ETF shares, avoiding taxable sales (Correct answer)
- ETFs automatically harvest tax losses on behalf of investors
- ETFs distribute fewer dividends than mutual funds
- ETF shares are created only in tax-exempt accounts
Correct answer: Authorized participants exchange baskets of securities for ETF shares, avoiding taxable sales
Authorized participants create or redeem ETF shares by exchanging baskets of the underlying securities in-kind, which avoids triggering capital gains distributions.
Question 5: A mutual fund's 'turnover rate' measures:
- The percentage of fund holdings replaced through buying and selling during the year (Correct answer)
- The rate at which investors redeem their fund shares
- The frequency of dividend distributions per year
- The speed at which fund assets grow relative to the market
Correct answer: The percentage of fund holdings replaced through buying and selling during the year
Turnover rate indicates how actively the fund manager trades the portfolio; high turnover generally leads to higher transaction costs and potential tax distributions.
Question 6: Which mutual fund category is best described as investing in both stocks and bonds to provide growth and income?
- Balanced fund (Correct answer)
- Money market fund
- Sector fund
- International fund
Correct answer: Balanced fund
Balanced funds maintain a mix of equities and fixed income securities, typically in a set ratio, aiming to provide both capital appreciation and income.
CFS CFS Mutual Funds & ETFs 2
What is 'style drift' in mutual fund management?